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There have been four noteworthy developments today that will
shape the investment environment. First, HSBC flash PMI for China came in at 49.7 from the
final January reading of 48.8. This will support
those who expect a soft landing in China. Technology and
consumer services led today's 1% advance in the Shanghai
Composite, which now sits at its highest level since early
December 2011. The soft landing scenario in China
helps lift sentiment in the region.Second, the minutes from the Bank of England meeting was
a bit of a dovish surprise. There were two
dissents to the decision to increase gilt purchases by GBP50 bln.
Both Miles and Posen favored a larger purchase
program. Sterling is clearly under-performing
today, though gilts are outperforming.

Third, the flash PMI from Europe was
uninspiring. The manufacturing showed a slight
improvement to 49.0 from 48.8, but expectations were for a larger
increase to 49.5. It remains below the boom/bust level of
50. Of note that orders appeared to fall at a slower
pace. The service component actually worsened. It
stands at 49.4 from 50.4 in January. Germany's readings were particularly
disappointing. The manufacturing survey was
reported at 50.1 down from 50.9, while the consensus hoped for
50.9. The German service PMI came in at 52.6, off from 54.5
last time and below the consensus as well (54.5). France's flash readings were more mixed.
Its manufacturing surprised to the upside, popping back
above 50 (50.2) from 48.5 last and expectation of 49 this time.
The disappointment was with services. The 50.3
reading shows expansion, just barely. The January reading
was 51.7 and the consensus expected improvement.
The weakness in services is noteworthy as it more likely reflects
weakness in domestic demand, while manufacturing could be partly
a function of weaker foreign demand. The ECB interest rates
are on hold, as it continues to focus on liquidity and the
upcoming 3-year lending. While the euro zone
economies do not appear to be accelerating to the downside, as
looked to be the case after poor performance at the end of last
year, the combination of austerity, de-leveraging and tighter
credit conditions still indicates the economic risks are to the
downside.Fourth,
turning your attention to Greece, Fitch weighed in and cut the
sovereign rating to C from CCC. This can hardly be
considered surprising, but that the verdict was delivered before
the PSI and cannot be helpful for the general risk appetite.
While the Greek government prepares for the PSI, many in
the market expect that Greece will have to invoke the collective
action clauses and that this will prove too much for ISDA and
that a credit event may still be declared, which would signal the
triggering of credit-default swaps. This is something
European officials wanted to avoid.